Business founders often start a business with a partner (or partners) and create a private company, where they both act as directors and shareholders. In public companies with many members and a large board of directors, this can also happen. However, co-founders’ ideas and interests may diverge at some point. The purpose of this article is to outline the issues and procedures surrounding appointing or removing a company director.
Steps to take
Appointing or removing a company director of company requires several steps.
The following three categories can be distinguished:
- Achieving shareholder and board approval;
- Obtaining consent from the individual; and
- An Australian Securities Information Commission (ASIC) notification is required.
Following these steps is very important. The appointment or removal of directors may not be fully effective if you fail to follow these processes. In addition to fines, noncompliance could result in considerable control and responsibility for a company’s directors. As a result, it is necessary to ensure that the company meets these requirements. All major changes must also be adequately documented by your company through good record-keeping practices.
Your company will need to comply with its own decision-making requirements, which are usually contained in the shareholders’ agreement or your company constitution. It may be provided in these documents how a company director may be removed from office. You will have to follow the replaceable rules in the Corporations Act if you don’t have either of these documents.
A new director can be appointed using the replaceable rules as follows:
- Ordinary resolution (50% majority vote) must be passed by shareholders at a general meeting to appoint a director;
- Through the same 50% ordinary resolution, the board of directors shall appoint a director.
There may be additional ways in which you can appoint directors under your company’s shareholders’ agreement or constitution. The founders and certain shareholders tend to have additional rights to appoint directors.
The Removal of a Director
Shareholders can also replace the replaceable rule by:
- A general meeting can pass an ordinary resolution removing a director;
- Replace the director at the same time.
Alternatively, a director of a company can resign in writing.
Directorships are extremely important to the company’s operations, but they cannot be locked into that position without being able to leave it. It is therefore important to have some knowledgeable directors so that if a director decides to resign, the company will be in capable hands. A company with an uneven number of directors is also more likely to avoid a deadlock on votes from a decision-making perspective.
Can a public company remove a director in other ways?
Besides having a director resign with written notice or being removed by an ordinary resolution in accordance with the replaceable rules, a company constitution can also include other valid mechanisms for removing directors. However, these mechanisms will only be valid if they do not conflict with the rules set out above in the Corporations Act.
A public company vs. a private company
It depends on whether you are a private or public company and whether you need to follow specific rules. Private companies are more flexible in appointing and removing directors.
When your company’s constitution has been modified or replaced, you may be able to remove a director by another method. However, if the replaceable rules are in place, you can remove a director by a resolution of the company.
A public company, on the other hand, can only remove a director by passing an ordinary resolution. Public companies, unlike private companies, can do this regardless of any agreement between the company, its members, and its directors. Only the shareholders of a public company have the power to remove a fellow director.